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Lev
Lev, Tax Advisor
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Foreign Exchange Rate

Resolved Question:

Hi, I have a really tricky question. I'm currently being audited by the IRS and we fight over the following issue: I bought a house in Switzerland in 1999 for CHF 1.25 Mio and sold it for CHF 1Mio in 2007. So, I had a loss of CHF 250,000 (= USD 220,000 exchange rate of August 2007). However, the IRS argues that I had a profit of USD 30,000 because the purchase price of CHF 1.25 Mio was only about $850,000 at the exchange rate of 1999, whereas the selling price was USD 880,000 at the exchange rate of 2007. In other words, the IRS uses the foreign exchange rate to create a taxable profit out of a loss. Is this legal? If yes, I need to know the specific law or tax code. Thanks very much in advance.
Submitted: 3 years ago.
Category: Tax
Expert:  Lev replied 3 years ago.
Hi and welcome to Just Answer!
The IRS is correct - for tax purposes - all transactions should be converted to USD using exchange rate at the time of transaction.
For US tax purposes the gain is never calculated in a foreign currency - but only in USD.
Your basis is determined in UDS as a purchase price at the time of purchase and your selling price is also determined in USD at the time of selling.

See for reference - http://www.irs.gov/businesses/small/article/0,,id=130524,00.html
You must express the amounts you report on your U.S. tax return in U.S. dollars. If you receive all or part of your income or pay some or all of your expenses in foreign currency, you must translate the foreign currency into U.S. dollars.
...
Make all income tax determinations in your functional currency. If your functional currency is the U.S. dollar, you must immediately translate into dollars all items of income, expense, etc. (including taxes), that you receive, pay, or accrue in a foreign currency and that will affect computation of your income tax. Use the exchange rate prevailing when you receive, pay, or accrue the item. If there is more than one exchange rate, use the one that most properly reflects your income.
Customer: replied 3 years ago.
Thanks for your answer, but I don't think this is correct because if it was the other way around that originally I had a profit of CHF 250'000 which would have turned into a loss due to exchange rates in my favor, the IRS would never have accepted that and would have found a way around "such unfavorable exchange rates" to still charge me taxes. And the question is what is this other way which the IRS would use when the exchange rates work against them.
Expert:  Lev replied 3 years ago.
You might not like the answer - but that doesn't mean it is incorrect.
All calculations in the US are made in US currency - neither you nor the IRS may choose a different currency or any other denomination units to calculate the gain - as long as US dollars is an official US currency - all calculations are in USD.
There is no other way.

You might have additional gain or loss on conversion - and that is reported separately.
In the publication 525 - www.irs.gov/pub/irs-pdf/p525.pdf the IRS clarifies how to treat foreign currency transactions - see page 33:
If you have a gain on a personal foreign currency transaction because of changes in exchange rates, you do not have to include that gain in your income unless it is more than $200. If the gain is more than $200, report it as a capital gain.


It will be long or short tern depending on how long you hold foreign currency. It is held more than one year before converting back into US dollars – that will be long term gain.
If the foreign currency is not converted into US dollars – no gain or loss recognized.
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 23192
Experience: Taxes, Immigration, Labor Relations
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